The Cleveland Fed’s current August year-over-year CPI estimate is 8.3%, down 0.2% from July’s 8.5% level. The bank estimates August Core CPI at 6.3%, up from July’s 5.9% level (while oil prices have fallen, food prices continue to rise). We quote the Cleveland Fed as the bank’s view on CPI and Core CPI is in-line with our thinking. View the Cleveland Fed’s CPI estimates HERE.
Our view is that the Fed ought to increase the Fed Funds Rate this month in between FOMC meetings, but will likely wait until the September meeting. The Fed can’t afford to take the Fed Funds Rate to where it needs to be to fight inflation on account of the $30 Trillion in public debt outstanding.
Where we differ with the market isn’t that the Fed will take rates higher than expected, but rather that the central bank will hold rates at a higher level for longer rather than pivot sometime in Q4 2022 or in Q1 2023. Stagflation is our base case for the remainder of this decade (read more HERE).
Regarding QT, look for the next tranche of Treasuries to mature and fall off of the Fed’s balance sheet at month end. At that time the Fed would likely show another net balance sheet reduction in the $30 billion range, pushing Treasury yields modestly higher.
Money Supply growth is approximately back in-line with pre-COVID levels, yet the excessive printing of 2020-2021 is the root cause of the sticky price inflation we are living with (View M2 growth HERE).